Industry Watch

Tips for managing risk in the food-processing industry

Tips for managing risk in the food-processing industry

Just some food for thought.

The food industry is in the middle of a capital-investment explosion. With recently implemented corporate-tax reforms, nearly all of the major food processors are racing to take advantage of this historic opportunity by updating outmoded plants or building entirely new facilities.

Very few industries evolve as quickly or as dramatically as the food industry. The low-fat/low-carb trends of just a few years ago have given way to organic, locally sourced, farm-fresh food products today. Demographic trends are changing just as rapidly, with smaller households, increasing wealth of millennials and growing ethnic groups. These ever-changing trends create serious challenges for food processors.

Because of these forces, no industry is more sensitive to project schedules and costs than the food industry. Though these large, multibillion-dollar corporations are well known on Wall Street, they can ill afford a poorly developed concept for a new production facility, particularly when the life cycles of products at these facilities increasingly are becoming shorter.

In planning food-processing plants today, modular and flexible layouts are a must. According to a recent study by the Industrial Asset Management Council, food-plant lifecycles today average 20–30 years, with some production lines shutting down and completely changing over after only three to four years in operation. If the product line required a highly specialized facility, it can sometimes sit idle for years before investment dollars can be budgeted for a changeover or the entire facility sold outright.

These factors put pressure on both industry planners and the engineering, architecture and construction firms that execute these projects. All parties must work together to come up with flexible, modular plant designs that can accommodate robotics and other high-technology equipment, minimize waste, and achieve net zero for emissions, odors and water usage. 

There is enormous pressure to forecast returns on investment factors for these projects. However, the accuracy of these forecasts is highly dependent on whether the project scope was defined correctly, thus allowing the project to be delivered on schedule and within budget. Unfortunately, neither owners nor contractors have a stellar record of performance in this area.

According to a recent review by the Construction Industry Institute (CII) of 975 large capital projects, only 5.4% of those projects met their authorized budgets and schedules within an acceptable margin. In fact, nearly 70% of the projects analyzed exceeded costs or schedules by greater than 10%. CII is affiliated with the University of Texas at Austin and is a consortium of more than 130 leading owner, engineering, contractor and supplier firms.

Of course, there are a variety of factors for this performance. The CII research shows that these variations often result from a poor understanding of the business and market variables that are crucial to developing accurate project scopes and budgets.  

What can be done to reverse these trends? In its report, CII states that the first key to reversing the trend of so many projects exceeding cost and schedule is to follow proper front-end loading (FEL) methodology. Put simply: This is a comprehensive preliminary design effort in which the project scope is defined sufficiently for a predictable cost framework and schedule to be established prior to the owner securing full funding for the project.

Beyond that first step, here are some additional suggestions:

Reimagine cost
With so many projects being delivered over budget, it is clear a new planning approach is needed. Designing and engineering a new facility only for current use can actually create additional unanticipated costs later. Even before a project is complete, it is not unusual to see design plans change. Taking a new perspective might reveal that higher design and construction costs could be offset by:

 

  • New technologies for plant production and operations that typically decline in cost as they become more prevalent
  • Increased automation, including the use of robotics that reduces waste, improves product yields and reduces labor costs
  • On-site utilities with self-generating capabilities that lower ongoing utility costs. These may include renewable sources like solar, wind or battery storage that could allow the facility to operate as a microgrid in the event of a widespread power outage.

Think about design-build
An integrated team of engineers, architects and constructors is one of the best ways to control costs and schedule because it is nearly certain that project course corrections will need to be made. 

A flexible modular facility starts with a flexible project approach and a team utilizing concepts such as pull planning. This approach ensures that permitting, procurement and other critical predecessors are tightly woven into detailed planning and design so that approvals are received, subcontractors hired, and equipment and materials are available in time to prevent any schedule delays.

In the food industry, nothing is more important in the current environment than predictable project performance. Taking project risks out of the equation with design-build is increasingly one of the most proven factors in controlling and managing costs.